Such an analysis would help Benedict Company in determining the products that earn more profit margins and the products that are turning out too costly for the company to manufacture. In effect, the company’s management obtain a better sense of the cost of producing the good or providing the service – and thereby can price their offerings better. Ending inventory costs can be reduced for damaged, worthless, or obsolete inventory. For obsolete (out of date) inventory, you must also show evidence of the decrease in value. Based on the data given for the two companies, determine the business type of each one.

The differences in timing as to when cost of goods sold is calculated can alter the order that costs are sequenced. The gross margin, resulting from the specific identification periodic cost allocations of given the following information for a retailer, compute the cost of goods sold. $7,260, is shown in Figure 10.6. Ending inventory was made up of 10 units at $21 each, 65 units at $27 each, and 210 units at $33 each, for a total specific identification ending inventory value of $8,895.

Data table

When applying perpetual inventory updating, a second entry made at the same time would record the cost of the item based on FIFO, which would be shifted from merchandise inventory (an asset) to cost of goods sold (an expense). The cost of goods sold, inventory, and gross margin shown in Figure 10.7 were determined from the previously-stated data, particular to FIFO costing. Regardless of which cost assumption is chosen, recording inventory sales using the perpetual method involves recording both the revenue and the cost from the transaction for each individual sale. As additional inventory is purchased during the period, the cost of those goods is added to the merchandise inventory account. Normally, no significant adjustments are needed at the end of the period (before financial statements are prepared) since the inventory balance is maintained to continually parallel actual counts.

• Inventory includes the merchandise in stock, raw materials, work in progress, finished products, and supplies that are part of the items you sell.
• Now, the cost of closing inventory is calculated by taking the cost of the latest or the most recent purchase and then calculating backwards till the time all the items in inventory are considered.
• Figure 10.20 shows the gross margin, resulting from the weighted-average perpetual cost allocations of $7,253.
• As the name suggests, under the Periodic Inventory system, the quantity of inventory in hand is determined periodically.
• This is because the COGS has a direct impact on the profits earned by your company.
• Therefore, COGS is calculated by adding the beginning inventory and any further purchases made during the year and then subtracting closing inventory from the sum of opening inventory and additional purchases.

The adjustment ensures that only the inventory costs that remain on hand are recorded, and the remainder of the goods available for sale are expensed on the income statement as cost of goods sold. Here we will demonstrate the mechanics used to calculate the ending inventory values using the four cost allocation methods and the periodic inventory system. The cost of goods sold, inventory, and gross margin shown in Figure 10.11 were determined from the previously-stated data, particular to AVG costing.